ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Interest-on-interest, also referred to as ‘compound interest’, is the interest that is earned when interest payments are reinvested. It is primarily used in the context of bonds, whose coupon payments are assumed to be re-invested and held until sale or maturity.

Detailed explanation-2: -Interest can be calculated in two ways: simple interest or compound interest. Simple interest is calculated on the principal, or original, amount of a loan. Compound interest is calculated on the principal amount and the accumulated interest of previous periods, and thus can be regarded as “interest on interest.”

Detailed explanation-3: -Compound interest is the interest on a deposit calculated based on both the initial principal and the accumulated interest from previous periods. Or, more simply put, compound interest is interest you earn on interest . You can compound interest on different frequency schedules such as daily, monthly or annually.

Detailed explanation-4: -Key Takeaways. Compound interest is interest calculated on the initial principal, which also includes all of the accumulated interest from previous periods. Generating “interest on interest” is known as the power of compound interest.

Detailed explanation-5: -Compound interest is the interest you earn on interest. This can be illustrated by using basic math: if you have $100 and it earns 5% interest each year, you’ll have $105 at the end of the first year. At the end of the second year, you’ll have $110.25.